Herbalife (HLF) shares were sent soaring yesterday after PriceWaterhouseCoopers announced the completion of its re-audit of the multi-level marketing company’s financials. The stock price of the nutrition, weight management, and skin-care products company surged upward more than 10% in response to the news. The trading of Herbalife stock this year carries an intriguing storyline featuring a heavyweight showdown between 2 of the hedge-fund industry’s biggest juggernauts, Carl Icahn and Bill Ackman.
At the end of last year Bill Ackman, founder and CEO of Pershing Square Capital, announced his $US1billion bet against the stock and presented his thesis of why he thinks the company is an illegal pyramid scheme. Other investors, most notably Carl Icahn, took the opposite side of the coin and poured their money into Herbalife on the belief that the company had become significantly under-valued. Since Ackman’s claim against the company sent the price tumbling last December, the stock has rallied back and climbed onward on the back of several strong earnings reports. Last night Pershing Square released a statement citing that PwC’s job as auditor was to verify the company filed its financial reports according to GAAP accounting standards and gave no indication of whether Herbalife is an illegal pyramid scheme or not. The graph below from ChartIQ — Visual Earnings shows Herbalife’s stock price on the top and the company’s financial report below with green on the bottom portion representing the company has outperformed the Wall Street and Estimize expectations.
The information below is derived from data submitted to the Estimize platform by a set of Buy Side and Independent analyst contributors.
Over the past 4 financial quarters since Ackman’s bet against the company, Herbalife has beaten analyst expectations on both earnings per share and revenue every single time and as a result the stock price has continued to push higher. The Wall Street consensus shown in grey represents sell-side analysts’ consensus expectations. The Estimize consensus shown in blue represents the expectations of a wider distribution of contributors including hedge-fund fund analysts, asset managers, independent research shops, students, and non professionals. By tapping into a wider range of contributors we have built a data set that is up to 69.5% more accurate than Wall Street, but more importantly it does a better job of representing the market’s true expectations.
Confidence ratings for each user are calculated through algorithms developed by our deep quantitative research which look at correlations between analyst track records and tendencies as they relate to future accuracy. We believe that everyone’s opinion matters, regardless of who they are, where they’re from, or what it says on their business card.
Over the past 2 years when enough data to create a consensus was available the Estimize community has been more accurate in forecasting EPS all 6 times. Shares of Herbalife could continue to soar over the next 6 months as our contributing analysts are expecting 2 more consecutive periods of Herbalife beating Wall Street earnings expectations.
For next quarter we are seeing a larger differential between the Estimize and Wall Street EPS consensus. The magnitude of the difference between the Wall Street and Estimize consensus numbers often identifies opportunities to take advantage of expectations that may not have been priced into the market. In this case, we’re seeing a larger differential between the Estimize and Wall Street numbers.
The revenue graph tells a similar story. The Estimize community was more accurate in predicting revenue 5 out of the past 6 times and our contributing analysts are expecting Herbalife to beat Wall Street expectations again when HLF reports its FQ4’13 results in February.
Even though our analysts believe that Herbalife can continue to experience large growth over the next 2 quarters, this particular company carries a substantial risk to investors. Although not all multi-level marketing companies are necessarily illegal pyramid schemes, if Ackman’s thesis is determined correct by regulators this stock could become worthless overnight. On the other hand if Herbalife is not shutdown, as it has failed to have been over the past year, this company’s earnings could continue to surge making shareholders a lot of money over the next 6 months.
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